K-Bro Linen Inc.

K-Bro Linen Inc. (TSX: KBL) is a Canada based owner and operator of laundry and linen processing facilities and provides a comprehensive range of general linen and operating room linen processing, management and distribution services to healthcare institutions, hotels and other commercial players.

Q2FY20 Financial Highlights: KBL announced its quarterly results, wherein the Company posted revenue of CAD 37.52 million, significantly lower from CAD 63.893 million in the previous corresponding period (pcp). The decline was majorly attributable to the travel ban across Canada and the UK, coupled with a significantly lower occupancy rate within the hospitality sector. Demand for both business and leisure airline travel reduced considerably across the globe, which has affected the hospitality segment. Wages and benefits expense, utilities expense, materials and supplies, repairs and maintenance etc. stood significantly lower than the previous corresponding quarter, which supported the EBITDA. The Company posted its second quarter EBITDA at CAD 10.055 million as compared to CAD 12.739 million in pcp. The Company posted net earnings of CAD 1.613 million as compared to CAD 3.547 million in the previous corresponding quarter.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company might face a setback due to a lower occupancy rate at the hospitality sector on account of travel ban across the globe.

Stock Recommendation: The stock of KBL corrected ~27% and ~15% in the last six months and one year, respectively amid the volatility in the equity market. By providing integral laundry and linen processing services to the hospitality and healthcare sectors, the Corporation has been designated an "essential" service in the jurisdictions in which it operates, which has allowed the Corporation's facilities to remain open and continue "normal" operations. The group have seen improvements in client activity with April's revenue being the low point and May and June gradually improving.  During the quarter, healthcare volumes began to return to more typical levels, while hospitality remained below historical levels. To deal with the current challenging time, the company took prudent strategies by reducing headcount, lowering certain capital expenditures and accessing available government assistance programs in order to support the working capital and preserving liquidity. The group remained well-positioned from a balance sheet and liquidity perspective with CAD 42.4 million of borrowing capacity on the revolving line of credit. As a precautionary measure, the group have completed an amendment to the credit facility that provides greater financial flexibility during this challenging period. Further, the group is deriving approximately 70% of Canadian revenue from the healthcare sector, where the group witnessed a growth in the recent past. The group expects its consolidated adjusted EBITDA margin for the full year to be between 12% and 16%. We expect demand for the group's offerings to improve as the governments across the states are lifting the containment measures. On the valuation front, the stock is trading at a forward price to cash flow multiple of 9.4x, which is significantly lower than the industry (Professional & Commercial Services) median of 13.3x. The company has witnessed an improvement in demand during the second quarter, especially from the healthcare segment, which is encouraging. Demand from the hospitality segment is also improving; however, we believe that traction is likely to remain under pressure in this segment owing to travel ban and social distancing norms. Hence, considering the aforesaid facts, we recommend a 'Speculative Buy' rating on the stock at the closing price of CAD 32.71 on August 25, 2020.

KBL Daily Technical Price Chart (Source: Refinitiv, Thomson Reuters)

Altius Minerals Corp

Altius Minerals Corp (TSX: ALS) is engaged in the business of obtaining diversified mining royalty. It holds interests in mining operations that produce metals and minerals such as copper, zinc, nickel, cobalt, gold, silver, and potash. The corporation also holds other pre-development stage royalty interests and various earlier stage royalties. 

Q2FY20 Financial Highlights: ALS announced its quarterly results, wherein the Company posted revenue and other income of CAD 10.270 million, as compared to CAD 15.185 million in the previous corresponding period (pcp). The reduction in revenue is mainly as a result of lower realized prices for base metals and potash, coupled with reduced LIORC dividends received and lower electricity demand resulting in lower fuel demand from certain thermal coal mines. Adjusted EBITDA stood at CAD 10.048 million reporting a decline of 39% than the prior year comparable quarter. The quarter was marked by higher Share-based compensation, a drastic decline in exploration and evaluation assets abandoned or impaired expense, a lower general and administrative expense and a lower cost of sales. Earnings before income taxes stood at CAD 4.021 million as compared to a loss of CAD 2.881 million in pcp, partially supported by lower interest on long-term debt, unrealized gain on fair value adjustment of derivatives and a significantly lower loss from impairment in associates. The Company posted net earnings of CAD 4.105 million, as compared to a loss of CAD 1.868 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to the ongoing pandemic, the price of base metals are likely to remain volatile, which may dampen the overall performance of the Company. Further, extended suspension of the production facility would hamper the production.

Valuation Methodology: P/CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock appreciated ~11% and ~14% in the last three months and six months, respectively. The company has ample liquidity, which would support the company’s working capital requirement and help in navigating through the current challenging time. The company’s iron ore segment is operating at normal levels and is supported by higher demand and pricing. Further, demand for base metals is expected to rise in the near term as the industrial and manufacturing activities are resuming, which would help in stabilizing metal prices. Though demand and production outlook seem stable for the group, we expect a near term pressure on royalty revenue as some of the mines had witnessed a temporary disruption in productions owing to COVID-19 restrictions. The management expects that long-term global potash demand is likely to remain positive while prices are likely to remain relatively weak in the near-term. The group is expected to utilize the increased cash flows for further investments in ARR, which is a key positive. In order to optimize its growth potential, the group would evaluate the merits of working with strategic co-investment partners and potentially spinning ARR out as a renewable energy royalty public company. The stock closed above the 200-days simple moving average (SMA) of CAD 10.08, indicating a bullish trend. We have valued the stock using Price to CF -based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Champion Iron Ltd, Sandstorm Gold Ltd. etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 11.16 on August 25, 2020.

ALS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

MTY Food Group Inc.

Decent Liquidity Levels: MTY Food Group Inc. (TSX: MTY) is a franchisor in the quick service and casual dining food industry. As on 25 August 2020, the market capitalization of the company stood at ~CAD 762.68 million.

Quarterly Performance (For the Period Ended 31 May 2020): During the second quarter ended 31 May 2020, system sales went down by 19% to CAD 670.7 million and revenue decreased by 22.1% from CAD 125.6 million to CAD 97.8 million. This was mainly due to the temporary closure of 2,757 locations at peak level. With the decline in system sales, EBITDA decreased by 47% to CAD 18.2 million. In the same time span, the company witnessed a net loss of CAD 99.1 million as compared to the net income of CAD 19.3 million in the pcp. In the second quarter of 2020, the company generated CAD 19.2 million of cash flows by operating activities, as compared to CAD 21.1 million for the same period in 2019. The decline was mainly due to the strict working capital management to preserve liquidities. In the same time span, the Company had CAD 49.9 million of cash on hand, and long-term debt of CAD 536 million.

Quarterly Performance (Source: Company Reports)

Outlook: In the short-term, the company is focused on re-opening the restaurants and is aiming to rebuild customer confidence by implementing proper safety measures. Although the Company doesn’t foresee sales comparability for at least the next 2-3 quarters, management believes that it will be able to regain customer confidence in the brands and restore the positive momentum.

Key Risks: The restaurant industry is likely to remain more challenging in the future because of the changes in customer consumption patterns. The company is also exposed to risks related to supply chain performance and growth strategies, the company’s ability to mitigate the impacts of COVID-19, changes in consumer discretionary spending and eating habits, etc.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company is reducing its operations which are not sustainable in the long term and is maintaining liquidity to adjust in the volatile market. The company remains in a decent financial position to execute its recovery plan and pursue its growth strategy. As per TSX, the stock of MTY is inclined towards its 52-weeks’ low level of CAD 14.23, proffering a decent opportunity for the investors to enter the market. The stock of MTY gave a return of 38.61% in the past three months and a return of 7.49% in the last one month. We have valued the stock using the P/E multiple based illustrative relative valuation approach and have arrived at a target upside of lower double-digit (in percentage terms). Considering the current trading levels, decent returns in the past one month, liquidity levels and re-opening of the stores, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 30.87, up by 0.1% on 25 August 2020.

MTY Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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